Fintech is spanning across asset classes and is dominating in most of them as the key theme. The industry is de facto growing, but investors should not ignore the risks. The majority of start-ups fail according to Forbes, a fact emphasizing the need for proper investment due diligence or manager selection depending on the desired exposure to the sector. The world is moving towards new technologies and innovations and investors need to adapt, without disregarding the essential discretionary/human element.

It is important to define the spectrum of fintech and the array of the solutions offered. In Stone Mountain Capital, we identified the following sectors and products that fintech companies apply their technology to:

Fintech is spanning across asset classes and is dominating in most of them as the key theme. The industry is de facto growing, but investors should not ignore the risks. The majority of start-ups fail according to Forbes, a fact emphasizing the need for proper investment due diligence or manager selection depending on the desired exposure to the sector. The world is moving towards new technologies and innovations and investors need to adapt, without disregarding the essential discretionary/human element.

It is important to define the spectrum of fintech and the array of the solutions offered. In Stone Mountain Capital, we identified the following sectors and products that fintech companies apply their technology to:

Insurance

Wealth Management/ Financial Planning

Investment/ Advisory/ Trading

Compliance/ Anti-Money Laundering (AML)/ Know Your Customer (KYC)

Debt Syndication

Trade Finance

Mortgages

Data Analytics

Banking and Payment Solutions

Distributed Ledger Technologies

Smart Contracts for execution

Cryptocurrencies

Cybersecurity

Direct Lending

Crowdfunding

Machine Learning/ Artificial Intelligence

Technological breakthroughs constitute integral part of evolution in our age and assist in humanity’s acumen, development of services and product innovation. Indubitably, the focal point recently is Blockchain technology and its applications across industries. According to a PwC survey, blockchain finds its applications useful in a plethora of industries with the future seeming auspicious for the financial services, hence this perspective focusses on the fintech spectrum. Healthcare and hospitality industries are also alluring venture and corporate investments, without excluding private equity, private debt and hedge funds, who eye lucrative investment opportunities in these industries.

According to Ernst & Young’s Adoption Index, China, India and United Kingdom have the highest adoption rates and these numbers are expected to grow especially due to a revamp of payment solution and insurance services. Direct Lending via online platforms has a discernible effect on the market’s growth and constitutes a salient point for discussion amongst investors. Figure 4 highlights the increase in capital invested from venture capitalists in fintech companies, despite a decrease in the number of deals over the last two years. The vast majority of capital was raised as seed or series A, B & C and less on private equity, debt and post-IPO equity.

Europe, and the UK especially, is the home for many major players in the alternative lending space such as Zopa and Funding Circle and has seen the commitments in the region surging to record levels according to Pitchbook data. What is remarkable in Figure 5 is that fintech has raised until July 2018 similar amounts to those raised in prior to 2017 years. European venture capital has raised $4.2bn and half of those account for UK closed-ended funds, underlining the importance of Brexit for the landscape. The institutionalisation of the market and its development was showcased earlier this year with the European Investment Fund (EIF) and KfW investing in Funding Circle’s securitisation and the first listing of a fintech investment trust, Augmentum Fintech Plc, backing fintech lenders and crowdfunders as a VC partner, on the London Stock exchange.

Figure 5. VC investment in European fintech companies from 2013 to July 2018, Source: Pitchbook

A report from by P2PFA, the UK Peer to Peer Finance Association, for 1Q18 reveals that cumulative lending via its platform members is approximating £9 billion in loan originations financing more than 50,000 businesses and over 200,000 individuals. It is easily comprehended that the online lending market is growing, and the market dynamics have altered mainly because the banks do not compete with platforms, but rather collaborate with them by providing facilities and warehousing lines of credit. Deloitte reported that investments into fintech lending are forecasted to increase to almost $11 billion in 2018, while the amount in 2017 and 2016 were $9.3 billion and $9.4 billion respectively.

Another funding source for start-ups, which traditionally struggled to access finance for their projects, is equity crowdfunding facilitated by fintech platforms such as Crowdcube and Seedrs. Investors such as venture capitalists and other individuals without deep pockets are having access to multiple early stage products and ideas. These platforms perform initial due diligence on its listings which assists the less sophisticated investors with complicated business models. For later stage companies, private equity funding is really surging in the market, and combined with the limited set of opportunities, are driving valuations high. The adoption rates are still low as seen in Figure 3, hence attracting private equity firms that eye massive opportunities in this space.

On the other hand, hedge funds would rarely invest in early stage companies, so they gain exposure via sectors that are susceptible to disruption and innovation such as TMT, energy and healthcare. Investing in disruptive tech could be challenging due to the abundance of products and services that are gratis offered and not generating sturdy returns. This make the manager selection essential searching for managers that can identify successfully solid technologies and themes that will change the world. Themes that dominate the hedge fund world are urbanisation, artificial intelligence, environmental sustainability, robotics, 3D printing, next generation self-driving cars, cloud computing, crypto and cash digitalisation. Equity hedge strategies that pursue those themes have performed extremely well over the last years and have been one of the top-performing strategies among the hedge fund universe. Moreover, hedge funds themselves are becoming a hub for scientists and are metamorphosing themselves into tech companies by developing their own sophisticated systems for trading and operations. The use of machine learning, algorithms and big data are the core techniques applied by CTAs and systematic funds to design their strategies and manage their portfolios. Investors have not lost their interest in CTAs despite the underperformance of last years and they are still seeking to eliminate human biases and relying on behavioural predictive analysis and big data for investments. CTA’s assets under management peaked at the end of 1Q18, bolstering the previous years’ trend of allocating to systematic strategies.

A number of CTAs have an eye on volatile assets, consequently investing in tech and crypto. The underlying volatility of Bitcoin combined with the institutionalisation of the market with the introduction of futures contracts and other index-related products such as ETNs, have captured the interest of CTAs and has led to the launch of crypto specific funds. According to Autonomous Next, the number of active crypto funds has surpassed 300 competing in a market of $256bn capitalisation and 1754 cryptocurrencies. Bitcoin and Ethereum account for 63% of the market cap, but both of them are struggling after last year’s rally.

Crypto is not equal to trading cryptocurrencies but constitutes a vehicle for funding project in the “digital world”. ICOs have become the alternative to venture capital and traditional stock markets for many start-ups that build their business on blockchain. The most common platform for an ICO fundraise is Ethereum, whose smart contract functionality makes the platform appealing. The issue with ICOs is its legitimacy, with People's Bank of China and the South Korean government declaring ICOs illegal. On the other hand, the SEC Chairman states that most ICOs classify as securities, South Koreans are revising the ban enacted in 2017 and Germany's second-largest stock exchange is developing an ICO platform. Total ICO size has more than doubled compared to 2017 and the number of ICOs has also increased compared to last year according to data from Coindesk, highlighting the growth of the market.

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, Stone Mountain Capital LTD. Readers should refer to the Disclaimer.

We are able to source any specific alternative investment search and maintain relationships with dozens of best-in-class hedge fund managers, private equity and private debt general partners (GPs) and real estate and infrastructure developers. We don’t pass any costs on to our investors, since our compensation comes from our mandated managers, GPs and developers. Please contact us, should you require further information about our solutions.

Stone Mountain Capital is a limited company (LTD) registered in England & Wales with registered number 8763463. The registered address is: 31 Compayne Gardens, London NW6 3DD, England, United Kingdom. Stone Mountain Capital LTD is registered (FRN: 729609) as Appointed Representative with the Financial Conduct Authority (‘FCA’) in the United Kingdom. Stone Mountain Capital LTD is the Distributor of foreign collective investment schemes distributed to qualified investors in Switzerland. Certain of those foreign collective investment schemes are represented by First Independent Fund Services LTD, which is authorised and regulated by the Swiss Financial Market Supervisory Authority (‘FINMA') as Swiss Representative of foreign collective investment schemes pursuant to Art 13 para 2 let. h in the Federal Act on Collective Investment Schemes (CISA). Stone Mountain Capital LTD conducts securities related activities in the U.S. pursuant to a Securities and Exchange Commission ('SEC') Rule 15a-6 Agreement with Crito Capital LLC, a U.S. SEC registered broker-dealer, and member of Financial Industry Regulatory Authority (‘FINRA’), Securities Investor Protection Corporation (‘SIPC’) and Municipal Securities Rulemaking Board (‘MSRB'). All information in this perspective including research is classified as minor acceptable non-monetary benefits ('MNMB') in accordance with article 11(5)(a) of the MiFID Delegated Directive (EU) 2017/593 and FCA COBS 2.3A.19.

Cautionary Statement on Forward-Looking Statements

This research may contain forward-looking statements concerning business, operations and financial performance. Any statements that are not of historical facts may be deemed to be forward-looking statements. You can identify these forward-looking statements by words such as "believes", "estimates", "anticipates", "expects", "plans", "intends", "may", "could", "might", "will", "should", "aims", or other similar expressions that convey uncertainty of future events or outcomes. Forward-looking statements include statements regarding our intentions, beliefs, assumptions, projections, outlook, opinions, analyses or current expectations concerning, among other things, results of operations, financial condition, business outlook, the industry, sector or region in which we operate or for which we provide research and the trends that may affect the industry, sector or region or us. Although we believe that we have a reasonable basis for each forward-looking statement contained in this research, we caution you that forward-looking statements are not guarantees of future performance. All of our forward-looking statements are subject to known and unknown risks, uncertainties and other factors that are in some cases beyond our control and that may cause our actual or our research results to differ materially from our expectations. Except as required by law, Stone Mountain Capital LTD undertakes no obligation to publicly update any forward-looking statements for any reason after the date of publication in this research, our website, or on linked websites, whether as a result of new information, future events or otherwise.

Risks

Investments in alternative investments are speculative and include a high degree of risk. Investors could lose their entire investment. Past performance is not necessarily indicative of future results. The risk of loss in trading interests can be substantial. You should carefully consider whether such trading or investment is suitable for you in light of your financial condition. Alternative investments are suitable only for persons who are able to assume the risk of losing their entire investment. Alternative investments often engage in leveraging and other speculative investment practices that can work against you as well for you; may increase the risk of investment loss; can be highly illiquid; may have restrictions on transferring interest; may have no secondary market nor is one expected to develop; are not required to provide periodic pricing or valuation information to investor; may involve complex tax structures and delays in distributing important tax information; are not subject to the same regulatory requirements as mutual funds or other investment vehicles; can have volatile performance; may be subject to substantial fees and charges for management, performances, advisory and other fees compared to other investment vehicles, and these fees and charges can offset profits. Alternative investment managers have total trading authority over their funds. Some portion of alternative investment trades may be executed on foreign exchanges.

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Any business communication, sent by or on behalf of Stone Mountain Capital LTD or one of its affiliated firms or other entities (together "Stone Mountain"), is confidential and may be privileged or otherwise protected. This e-mail message is for information purposes only, it is not a recommendation, advice, offer or solicitation to buy or sell a product or service nor an official confirmation of any transaction. It is directed at persons who are professionals and is not intended for retail customer use. This e-mail message and any attachments are for the sole use of the intended recipient(s). Our LTD accepts no liability for the content of this email, or for the consequences of any actions taken on the basis of the information provided, unless that information is subsequently confirmed in writing. Any views or opinions presented in this email are solely those of the author and do not necessarily represent those of the limited company. Any unauthorised review, use, disclosure or distribution is prohibited. If you are not the intended recipient, please notify the sender by reply e-mail and destroy all copies of the original message and any attachments. By replying to this e-mail, you consent to Stone Mountain monitoring the content of any e-mails you send to or receive from Stone Mountain. Stone Mountain is not liable for any opinions expressed by the sender where this is a non-business e-mail. Emails are not secure and cannot be guaranteed to be error free. Anyone who communicates with us by email is taken to accept these risks. This message is subject to our terms at: www.stonemountain-capital.com/disclaimer.

STONE MOUNTAIN CAPITAL RESEARCH PERSPECTIVE VOL.81​Indubitably, the cryptocurrency market has caught the attention of investors and traders, who are engaging vigorously due to its volatile nature. The crypto market has reached a market capitalisation of ca. $400 billion, half of which is in Bitcoin ($140bn) and Ethereum ($70bn). Crypto markets are affected on a large scale by regulatory and sentiment factors, which makes technical analysis desirable, hence many CTAs that apply such techniques have added cryptocurrencies in their trading portfolios. One of the theories that could reveal patterns is the Elliott Wave Principle, developed in the late 1920s and believing that the swings of market psychology appear in similar repetitive patterns, which Elliot classified as waves. The waves were essentially the consistencies of investors’ reactions to external factors. Despite the principle’s popularity, its difficulty to be applied should be stressed out as investors attempt to analyse the patterns. The divergence in opinions about the Bitcoin’s price projection highlights the predicaments in applying theories and considering the unregulated nature of crypto markets all theories may lead to a worth of zero. The main and biggest issue that technical traders face is defining the duration and length of the first wave and then to apply the rules, therefore many traders that analyse the same horizon may end up with different signals. The other hurdle is the applicability of the principle in cryptocurrencies. This perspective will consider it applicable due to the sentiment driven Bitcoin, although this may change in the future with the inclusion of more computerised trading. For the purpose of this perspective, we will examine different time horizons and the most recent crashes and rallies of the Bitcoin price.

Indubitably, the cryptocurrency market has caught the attention of investors and traders, who are engaging vigorously due to its volatile nature. The crypto market has reached a market capitalisation of ca. $400 billion, half of which is in Bitcoin ($140bn) and Ethereum ($70bn). Crypto markets are affected on a large scale by regulatory and sentiment factors, which makes technical analysis desirable, hence many CTAs that apply such techniques have added cryptocurrencies in their trading portfolios.

One of the theories that could reveal patterns is the Elliott Wave Principle, developed in the late 1920s and believing that the swings of market psychology appear in similar repetitive patterns, which Elliot classified as waves. The waves were essentially the consistencies of investors’ reactions to external factors. Despite the principle’s popularity, its difficulty to be applied should be stressed out as investors attempt to analyse the patterns. The divergence in opinions about the Bitcoin’s price projection highlights the predicaments in applying theories and considering the unregulated nature of crypto markets all theories may lead to a worth of zero.

The main and biggest issue that technical traders face is defining the duration and length of the first wave and then to apply the rules, therefore many traders that analyse the same horizon may end up with different signals. The other hurdle is the applicability of the principle in cryptocurrencies. This perspective will consider it applicable due to the sentiment driven Bitcoin, although this may change in the future with the inclusion of more computerised trading.

For the purpose of this perspective, we will examine different time horizons and the most recent crashes and rallies of the Bitcoin price. Starting from 16 December 2017, when the price was $19,343, we can observe a downward trend to the price of Bitcoin, which is evident in Figure 1 below.

Figure 1. Bitcoin price since December 2017, Source: Coindesk

Applying the principle to this downward trend for a longer period of time, the price should be heading towards wave B, which is close to $7,000 before transitioning to wave C in $9,100.

If we start analysing from the 6th April 2017 and define it as a starting point of an upward trend according to Figure 1, then we are still on wave B, with a projected price of $9,517 before jumping on wave C and reaching $9,000. In both cases, the price after the completion of wave C would be around $9,000. The results will depend on the horizon you are looking and the timing of waves, so the above results can only be illustrative of the Elliot Waves Principle application. Applying the principle since Bitcoin’s inception, we observe that the price does not stay within boundaries for the second and third wave, as well as wave A, meaning that drawdowns and rallies may last longer than expected. In this case, we are moving towards wave C at $8,660.

Using other techniques such as RSI and MACD, there is a very bullish view on the price, indicating that at the moment the crypto currency is oversold.

Figure 4. NYSE Bitcoin Index, Source: StockCharts

Using different tools, horizons and datasets when trading Bitcoin should consider the risky nature of the asset class. The debate around being a bubble or an established asset class is not over, and no one can project its value. The different views definitely underline the heterogeneity of the markets and the potential further growth of the market. With more institutional backing, the crypto market will evolve into something completely different. More liquidity, trading volume and regulations may transform the asset class in addition to more derivatives like futures, options, CFDs and ETFs/ETNs. Currently, institutional investors consider crypto currencies similar to venture investing, which means that a longer-term view could be more appropriate. The development of more products will definitely allow crypto markets to grow. Several of the biggest banks that were initially opposed to Bitcoin, are now offering services that facilitate its trading with the most recent example being Goldman Sachs opening Bitcoin trading operations.

Taking a longer-term view at the currencies market and specifically the U.S. dollar against British Pound Sterling and Swiss Franc, we can easily observe trends, and the application of Elliot Waves Principle can prove itself inspirational for trading but as we are taking into consideration past data and different economic environment, they should not rely completely on the principle. For the USD/GBP pair, the theory suggests that the markets are on wave 5, which peaks at 0.87, while for USD/CHF the principle suggests that we are currently past wave 5.

In this perspective, we utilised the Elliot Waves Principle as a tool to view crypto markets on a shorter and longer period of time, considering all the predicaments around the principle as outlined in the analysis above. It is easily observed that different starting and ending points conclude to different results regarding the phase of the cycle and the price range, bullish and bearish signals, but nevertheless it is a useful tool to analyse markets that are largely driven by sentiment.

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, Stone Mountain Capital LTD. Readers should refer to the Disclaimer.

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Stone Mountain Capital’s team will be attending and speaking at the following conferences, please let us know if you would like to schedule a meeting:

We are able to source any specific alternative investment search and maintain relationships with dozens of best-in-class hedge fund managers, private equity and private debt general partners (GPs) and real estate and infrastructure developers. We don’t pass any costs on to our investors, since our compensation comes from our mandated managers, GPs and developers. Please contact us, should you require further information about our solutions.

Stone Mountain Capital is a limited company (LTD) registered in England & Wales with registered number 8763463. The registered address is: 31 Compayne Gardens, London NW6 3DD, England, United Kingdom. Stone Mountain Capital LTD is registered (FRN: 729609) as Appointed Representative with the Financial Conduct Authority (‘FCA’) in the United Kingdom. Stone Mountain Capital LTD is the Distributor of foreign collective investment schemes distributed to qualified investors in Switzerland. Certain of those foreign collective investment schemes are represented by First Independent Fund Services LTD, which is authorised and regulated by the Swiss Financial Market Supervisory Authority (‘FINMA') as Swiss Representative of foreign collective investment schemes pursuant to Art 13 para 2 let. h in the Federal Act on Collective Investment Schemes (CISA). Stone Mountain Capital LTD conducts securities related activities in the U.S. pursuant to a Securities and Exchange Commission ('SEC') Rule 15a-6 Agreement with Crito Capital LLC, a U.S. SEC registered broker-dealer, and member of Financial Industry Regulatory Authority (‘FINRA') and Securities Investor Protection Corporation ('SIPC').

Cautionary Statement on Forward-Looking Statements

This research may contain forward-looking statements concerning business, operations and financial performance. Any statements that are not of historical facts may be deemed to be forward-looking statements. You can identify these forward-looking statements by words such as "believes", "estimates", "anticipates", "expects", "plans", "intends", "may", "could", "might", "will", "should", "aims", or other similar expressions that convey uncertainty of future events or outcomes. Forward-looking statements include statements regarding our intentions, beliefs, assumptions, projections, outlook, opinions, analyses or current expectations concerning, among other things, results of operations, financial condition, business outlook, the industry, sector or region in which we operate or for which we provide research and the trends that may affect the industry, sector or region or us. Although we believe that we have a reasonable basis for each forward-looking statement contained in this research, we caution you that forward-looking statements are not guarantees of future performance. All of our forward-looking statements are subject to known and unknown risks, uncertainties and other factors that are in some cases beyond our control and that may cause our actual or our research results to differ materially from our expectations. Except as required by law, Stone Mountain Capital LTD undertakes no obligation to publicly update any forward-looking statements for any reason after the date of publication in this research, our website, or on linked websites, whether as a result of new information, future events or otherwise.

Risks

Investments in alternative investments are speculative and include a high degree of risk. Investors could lose their entire investment. Past performance is not necessarily indicative of future results. The risk of loss in trading interests can be substantial. You should carefully consider whether such trading or investment is suitable for you in light of your financial condition. Alternative investments are suitable only for persons who are able to assume the risk of losing their entire investment. Alternative investments often engage in leveraging and other speculative investment practices that can work against you as well for you; may increase the risk of investment loss; can be highly illiquid; may have restrictions on transferring interest; may have no secondary market nor is one expected to develop; are not required to provide periodic pricing or valuation information to investor; may involve complex tax structures and delays in distributing important tax information; are not subject to the same regulatory requirements as mutual funds or other investment vehicles; can have volatile performance; may be subject to substantial fees and charges for management, performances, advisory and other fees compared to other investment vehicles, and these fees and charges can offset profits. Alternative investment managers have total trading authority over their funds. Some portion of alternative investment trades may be executed on foreign exchanges.

Any business communication, including the content of this research perspective, sent by or on behalf of Stone Mountain Capital LTD or one of its affiliated firms or other entities (together "Stone Mountain"), is confidential and may be privileged or otherwise protected. This e-mail message is for information purposes only, it is not a recommendation, advice, offer or solicitation to buy or sell a product or service nor an official confirmation of any transaction. It is directed at persons who are professionals and is not intended for retail customer use. This e-mail message and any attachments are for the sole use of the intended recipient(s). Our LTD accepts no liability for the content of this email, or for the consequences of any actions taken on the basis of the information provided, unless that information is subsequently confirmed in writing. Any views or opinions presented in this email are solely those of the author and do not necessarily represent those of the limited company. Any unauthorised review, use, disclosure or distribution is prohibited. If you are not the intended recipient, please notify the sender by reply e-mail and destroy all copies of the original message and any attachments. By replying to this e-mail, you consent to Stone Mountain monitoring the content of any e-mails you send to or receive from Stone Mountain. Stone Mountain is not liable for any opinions expressed by the sender where this is a non-business e-mail. Emails are not secure and cannot be guaranteed to be error free. Anyone who communicates with us by email is taken to accept these risks. This message is subject to our terms at: www.stonemountain-capital.com/disclaimer.

​Hedge FundsHedge funds started 2017 under pressure and the overall industry’s model was in question. Performance and fees were the main topic of debate among investors at the beginning of the year, but hedge funds managed to pull a strong year with no down month. Despite losses from some large managers, the industry overall generated strong returns according to HFR data attracting more capital. Per HFR, total hedge fund industry AuM increased by $59bn to $3.21tr, the sixth consecutive quarterly record for total industry AuM. The inflows suggest a sign of regained optimism, but the industry will need to sustain its performance long-term in order to regain its calibre. The oxymoron of the industry is the fact that equity hedge were the best performing strategies amongst hedge funds but suffered the biggest outflows. Macro, CTAs and multi-strategy attracted more capital this year, and given the outlook for more volatility and less central bank intervention, investors target further allocations in those sub-sectors.

Stone Mountain Capital Strategies2017 was the year producing the strongest return for hedge funds since 2013 and second best since 2009. Stone Mountain Capital strategies outperformed in last year’s environment across all asset classes. Credit was the only strategy underperforming its peers, caused by yield compression in the direct lending space. One, out of only three negative strategies was in credit, while the other two, were CTAs that struggled amid the low volatility and trendless environment. Despite these two strategies, tactical trading was overall the best performing strategy with strong returns generated by discretionary global macro and cryptocurrency. Equities enjoyed a very profitable year and Stone Mountain Capital’s mandated equity hedge managers produced astonishing returns, beating their traditional and alternative peers. Finally, fund of hedge funds recovered from their 2016 losses, surviving while the industry’s model is evolving.

Figure 3. Stone Mountain Capital In-House Indices vs. Major Benchmark Indices Hedge Funds and Long Only in 2017, Stone Mountain Capital Research; SMC strategy indices are not investable products but are used as indication of our managers' performance and are calculated with the equally-weighted method.

Private DebtPrivate debt continued its fundraising momentum in 2017 seeking to capitalise on investors’ search for uncorrelated sources of income. It was a record year for commitments in the asset class according to Pitchbook, a fact that highlights the increased competition in the space. This competition subsequently led to yield compression and more covenant lite lending agreements. Manager selection and due diligence becomes crucial amid this heated market, where deal flow is increased and the quality of deals deteriorated. The Alternative Credit Council projects the asset class to reach $1trilling from $630bn currently until 2020. The interest in the space is caused by the compression in the liquid credit markets, which urges investors to explore the private credit spectrum, with focus on floating-rate strategies like US CLOs and direct lending. Investors seek to harvest complexity, illiquidity and regulatory premiums in private credit, whilst keeping its low volatility profile. Investors target mainly mezzanine, direct lending and distressed debt in their search for yield.

Private EquityThe investors’ appetite for private equity continued last year bringing the dry powder in the asset class to record levels. Closing larger funds takes less time than usual, but the challenge remains the identification of good investment opportunities and deal sourcing. High valuations and exit environment were the challenges in 2017 and remain for the year to come. In 2017, almost 1,700 companies went public, a large increase since 2016. This year, investors would look into niche private equity funds investing in unique sectors that generate premiums not available in public markets. Direct competition from investors increased the entry prices and last year shaped a risky environment with huge sum of dry powder, slowing down exit activity and high valuations. Approximately 4,200 private equity deals were completed in 2017 reflecting capital of $347bn according to Preqin. The political environment seemed to stabilise in 2017, with concerns remaining about the terms of Brexit. This helped private equity firms raise record-level capital of $453bn during 2017.

Figure 7. Global Private Equity Fundraising 1996-2017, Source: Preqin

Real Estate2017 was a year of records for real estate equally. Urbanisation, co-living and co-working, and increased use of technology were the main themes last year and we expect those to continue in 2018. Almost 5,200 transactions were completed in 2017, while the asset class saw their assets, number of funds and dry powder reaching record levels. Brexit caused turbulences in the UK and European market, with other major hubs like Frankfurt, Paris and Dublin exploiting the new environment. Interest rates, deal flow and valuations were the main challenges last year and the increased number of funds made manager selection tougher.

Figure 8. Real Estate Fundraising 2010-2017, Source: Preqin

Cryptocurrencies2017 was the breakout year for crypto currencies and attracted a lot of attention among institutions. Ripple, a new solution for bank payment, was the biggest winner among its peers and the 2 major cryptocurrencies, according to market cap, Bitcoin and Ethereum also generated astonishing but volatile returns. Last year, we evidenced a lot of regulatory events in an attempt to better regulate the asset class particularly in Asia. During the summer, China shut down currency exchanges and later on banned ICOs. The SEC rejected the first Bitcoin ETF application but is reviewing a plethora of other related instruments. On the other hand, countries like Russia, India, Japan and Switzerland seem to be accepting the use of Bitcoin for transactions including regulatory frameworks. The most recent evolvement of the asset class was the launch of future contracts, which will allow for better price discovery, less volatility, shorting and better regulation. The institutionalisation of the asset class is boosting the capitalisation growth of the market, which currently stands at $551bn. Bitcoin experienced huge volatility movements, starting from less than $1,000, jumping to $20,000 before retreating to around $10,000. Ethereum also experienced a large increase in its value, as it started the year trading at $10 and currently is trading at nearly $1,150. 2018 could be a year to determine the future of the market and we expect institutional money to flow in the asset class for the first time.

This perspective is neither an offer to sell nor a solicitation of an offer to buy an interest in any investment or advisory service by Stone Mountain Capital LTD. For queries please contact Alexandros Kyparissis under email: alexandros.kyparissis@stonemountain-capital.com and Tel.: +44 7843 144007. For further information around our research and advisory services please contact Oliver Fochler under email: oliver.fochler@stonemountain-capital.com and Tel.: +44 7922 436360. For information about our alternative investment solutions, please contact: ir@stonemountain-capital.com.

The views expressed in this article are those of the authors and do not necessarily represent the views of, and should not be attributed to, Stone Mountain Capital LTD. Readers should refer to the Disclaimer.

Stone Mountain Capital is a limited company (LTD) registered in England & Wales with registered number 8763463. The registered address is: 31 Compayne Gardens, London NW6 3DD, England, United Kingdom. Stone Mountain Capital LTD is registered (FRN: 729609) as Appointed Representative with the Financial Conduct Authority (‘FCA’) in the United Kingdom. Stone Mountain Capital LTD is the Distributor of foreign collective investment schemes distributed to qualified investors in Switzerland. Certain of those foreign collective investment schemes are represented by First Independent Fund Services LTD, which is authorised and regulated by the Swiss Financial Market Supervisory Authority (‘FINMA') as Swiss Representative of foreign collective investment schemes pursuant to Art 13 para 2 let. h in the Federal Act on Collective Investment Schemes (CISA). Stone Mountain Capital LTD conducts securities related activities in the U.S. pursuant to a Securities and Exchange Commission ('SEC') Rule 15a-6 Agreement with Crito Capital LLC, a U.S. SEC registered broker-dealer, and member of Financial Industry Regulatory Authority (‘FINRA') and Securities Investor Protection Corporation ('SIPC').

The most popular and controversial topic this year within finance and tech circles is the rise of Bitcoin and crypto markets. Bitcoin jumped into mainstream and financial products like futures, options, funds, certificates, ETNs, ETFs are being designed to allow exposure to cryptocurrencies. The last one and a half month, we evidenced a huge growth of the crypto market, with its capitalisation surpassing $561bn from $182bn on the first day of November. The crypto market metamorphosed into a market bigger than CTAs, a $343bn well-established alternative investment market. Crypto market, according to CoinMarketCap, consists of 1360 cryptocurrencies, but Bitcoin and Ethereum account for around 67% of this market. Bitcoin market cap became almost three times bigger within two months, being a $318bn market now, with its price rising from $6,750 in the first day of November to $18,000. Ethereum was the fourth largest coin market in 2015 behind Bitcoin, Ripple and LiteCoin, but as we approach the end of 2017, the $66bn Ethereum market cap is nearly double of Ripple and Litecoin’s capitalisation combined.

The potential of growth in the market is huge considering the evolution of products for trading and indexing, with focus on Bitcoin and Ethereum. CBOE launched the first future contracts on bitcoin on 10th December 2017, adding interesting features to bitcoin trading, such as liquidity, transparency and clearing on a regulated market. CME Group is also launching future contracts on bitcoin on 18th December 2017 and these actions complement previous efforts of launching ETFs around Bitcoin, Ether and Blockchain. On the first trading day, more than 2,500 contracts were traded according to CBOE, and there is already a huge spread between spot and future markets.

Eurekahedge and Hedge Fund Research (HFR) have developed indices on crypto markets with the underlying constituents being investment managers trading cryptocurrencies directly since 2013 and 2015 respectively. The low volatility environment suffocates CTAs, which desperately seek volatility trades making the crypto space more appealing to them, especially Bitcoin and Ethereum that have already traded financial products with currently the highest trading volume. Examining weekly data since September 2015, we observed relatively high correlation of 0.89 between the two coins, in which period both coins’ price rose 787 times for Ethereum and 78 times for Bitcoin respectively. Apart from the price rise, Ethereum surpassed bitcoin in terms of transactions number in 2017 for the first time in its short life, indicating the potential of the coin.

Figure 2. Bitcoin and Ethereum number of transactions from August 2015 to December 2017, Source: Etherscan, Blockchain Luxembourg, Stone Mountain Capital Research

​CTAs are struggling compared to their cryptocurrency peers, considering they both apply an algorithmic approach to the markets they target. CTAs are in their majority trend-followers and positioned long volatility, which remains at all-time lows across traditional major asset classes equities, bonds, rates, fiat currency and commodities. Comparing CTAs and crypto funds according to HFR data, we evidence nearly zero correlation and massive discrepancy in their risk-adjusted ratios, with crypto funds exploiting the huge volatility in the market in their favour. We see a trend in 2017 for CTAs trying to improve recent years’ bad performance and starting to apply their algorithms in the crypto markets in the ‘search for volatility’. The recent development of bitcoin futures, options and spread bets will support more CTAs entering the crypto markets. Autonomous Next reported more than 124 hedge funds pursuing crypto strategies as of October 2017 accounting for overall over $2.3bn in AuM, while Preqin reports 1,191 CTAs and BarclayHedge states CTA AuM with $343bn. With the futures launched, and ETFs on their way, an overlap between the two strategies may be inevitable as they will compete in the same systematic space.

The Ethereum blockchain constitutes the basis of the majority of Initial Coin Offerings (ICO), via which $3.75bn have been raised so far, out of which around $3.4bn have been raised in 2017 alone. Ethereum is facilitating the implementation of real world contracts in the digital spectrum by the ‘smart contracts’ on its blockchain. The fundraising momentum cooled after the decision of People’s Bank of China to ban all ICOs and recent fraud investigations from the SEC.

Figure 4. ICO Fundraising, Source: Coindesk ICO Tracker

The access to crypto markets is becoming easier with mobile wallet and payment providers like Revolut adding Bitcoin, Ethereum and Litecoin, and banks like Swissquote adding Bitcoin, to their platforms providing seamless exchange of fiat currency into crypto currencies. These factors have added volume to the market with the pricing clearly being affected. The launch of further futures, options and derivatives will allow for deep price discovery and correct inefficiencies in pricing. This will also led to institutional money inflow, and in Stone Mountain Capital we have evidenced unprecedented interest in the space from institutional investors since the summer of 2017. Volatility and security were always the main issues of the crypto market combined with the fundamental problem of a definition of its real value. Its unregulated nature discourages the evolution of the market, but first steps for regulation were made and we expect more to follow in the near future, which will be a positive development for crypto markets. The crypto world will not suddenly transform into a regulated environment, but Bitcoin and Ethereum are on the right direction. Futures are the starting point, ETFs probably the continuation of the journey. There is currently a set of pending ETF applications in the U.S. based on the bitcoin futures and underlying crypto markets and we expect the first approvals early in 2018, which should provide further liquidity and volume to crypto markets based on the investability of crypto market from institutional investors.

A frequent and practical question is the way of getting exposure to cryptocurrencies either by buying directly in a crypto wallet or by buying financial products around them. Buying directly could prove complex and tricky, especially when the individual or firm do not possess the technological knowledge on security matters and storage of the coins in a wallet or on / off the exchange. Trading is 24/7 and requires constant monitoring and risk management. The biggest misconception is the store of value, as having a crypto wallet is not equal to storing currency, but rather a transaction record on the blockchain. In case of a market crash or run on the crypto market, there are questions around market liquidity and certain wallet providers might face technological challenges of keeping their service online, leading to potential delays for investors trying to sell their positions. Alternatively, there are listed certificates on exchanges that track Bitcoin and Ethereum prices, private and listed funds that invest directly in cryptocurrencies and since the 10th of December, CBOE future contracts are available for trading. The list of products requesting approval to be launched is long and the most notable example is the Winklevoss Bitcoin Trust (Bitcoin storage), Ether ETF (Ether storage), Rex Short Bitcoin ETF (futures) and RealityShares Nasdaq Blockchain ETF. Currently, bitcoin products trade on a premium, including CBOE futures, which trade at the moment on a premium of around $1000, listed Bitcoin funds in OTC and certificates that track the price of Bitcoin and Ethereum. Worth mentioning is the ability to trade pre- and after-market in a very thin and illiquid market, where volatility is much higher than normal trading hours and price inefficiencies occur, which can be exploited. Cryptocurrencies constitute an interesting and evolving asset class with further growth potential due to the just commencing inflows from institutional investors, but bear large risks due to the unregulated nature of crypto markets, complexity, security concerns and the general market structure and liquidity. As a diversifier in a portfolio of traditional equities and bonds, cryptocurrencies can deliver uncorrelated alpha.

This perspective is neither an offer to sell nor a solicitation of an offer to buy an interest in any investment or advisory service by Stone Mountain Capital LTD. For queries please contact Alexandros Kyparissis under email: alexandros.kyparissis@stonemountain-capital.com and Tel.: +44 7843 144007. For further information around our research and advisory services please contact Oliver Fochler under email: oliver.fochler@stonemountain-capital.com and Tel.: +44 7922 436360. For information about our alternative investment solutions, please contact:ir@stonemountain-capital.com.

The views expressed in this article are those of the authors and do not necessarily represent the views of, and should not be attributed to, Stone Mountain Capital LTD. Readers should refer to the Disclaimer.

Stone Mountain Capital is a limited company (LTD) registered in England & Wales with registered number 8763463. The registered address is: 31 Compayne Gardens, London NW6 3DD, England, United Kingdom. Stone Mountain Capital LTD is registered (FRN: 729609) as Appointed Representative with the Financial Conduct Authority (‘FCA’) in the United Kingdom. Stone Mountain Capital LTD is the Distributor of foreign collective investment schemes distributed to qualified investors in Switzerland. Certain of those foreign collective investment schemes are represented by First Independent Fund Services LTD, which is authorised and regulated by the Swiss Financial Market Supervisory Authority (‘FINMA') as Swiss Representative of foreign collective investment schemes pursuant to Art 13 para 2 let. h in the Federal Act on Collective Investment Schemes (CISA). Stone Mountain Capital LTD conducts securities related activities in the U.S. pursuant to a Securities and Exchange Commission ('SEC') Rule 15a-6 Agreement with Crito Capital LLC, a U.S. SEC registered broker-dealer, and member of Financial Industry Regulatory Authority (‘FINRA') and Securities Investor Protection Corporation ('SIPC').

A recent PwC report showed that global assets under management are going to surpass $145.4 trillion by 2025, currently at $84.9 trillion. Investments targeting alternative asset classes will more than double to 21.1 trillion. Investors will be looking to pursue opportunities in established asset classes such as real assets, private equity, private debt (trade finance, peer-to-peer lending in particular) and hedge funds and in more niche markets including machine learning/systematic strategies and cryptocurrencies. In this perspective, we focus on cryptocurrency and systematic trading strategies due to the prevailing “phrenitis” of investors allocating to the space or being in the process of exploring the markets. In an earlier perspective, we examined the effects of adding bitcoin and systematic CTAs to institutional portfolios and evidenced the enhancement of the risk/return profile as both strategies have uncorrelated alpha features, desirable for investors.

Figure 1 highlights the growth of CTA and cryptocurrency (in particular Bitcoin / Ethereum) markets, which all stand at all-time high AuM, while still attracting interest and inflows from (institutional) investors.

With volatility as measured by CBOE’s VIX index and yields being extremely low for a long period of time, investors are looking for strategies generating high returns. IMF estimates around $500bn in volatility products, and many of the volatility strategies apply systematic rule-based trading. The current low volatility environment deteriorates the performance of CTAs, but low or negative performance does not prevent inflows in the strategy. According to coinmarketcap.com, there are 1238 cryptocurrencies with total market capitalisation of over $182bn, with bitcoin with $106bn accounting for over 58% of total market cap and Ethereum following with $29bn. Institutional investors deploy currently none or only tiny fractions of their assets in cryptocurrencies due to the largely unregulated market structure. According to Autonomous NEXT, there are 124 hedge funds pursuing crypto strategies as of October 2017 with an overall AuM of just over $2.3bn. The majority of crypto assets are therefore held by individual non-institutional investors. Despite global tightening of regulations and markets being shut down by regulators (e.g. China closed bitcoin exchanges and stopped all Initial Coin Offerings (ICOs)), bitcoin transactions have increased alongside its price as evidenced in Figure 2. The fact that large institutions have still not been involved with bitcoin investing reveals huge growth potential for the asset class and combined with its limited supply of 21m, economics 101 teaches us, that the price should increase. Sovereign wealth funds manage approximately $7.5tn, which combined with almost $63tn from major pension and insurance funds gives us a total of $70tn. A good illustration of the growth potential of the market would be if one large institution invests just 1% of its assets into bitcoin. If one of the larger sovereign wealth funds with $1tr in assets invests only one percent of AuM in bitcoin, its AuM would be almost 10% of the market current capitalisation. A one percent investment of one of the large global asset managers for pensions and insurers like BlackRock with $5.7tn in assets, would lead to an increase of market cap by almost 60% in bitcoin. The fear of missing out and the further advancement of the crypto markets could be leading growth for institutional investors. CBOE and Gemini Trust are already cogitating the launch of bitcoin trading products such as futures.

Figure 2. Bitcoin Price in U.S. dollars and Number of Transactions as of 30/10/2017, Source: Coindesk, Blockchain Luxembourg, Stone Mountain Capital Research

ICOs are predominantly launched on basis of tokens within smart contracts on the Ethereum blockchain. There are currently 348 tokens in circulation with a tendency for almost exponential growth in the number of offerings. Ethereum is not limited in supply like bitcoin, but rather constitutes a platform for the implementation of real world contracts in the digital space. The new issuance of tokens and adoption of smart contracts on the Ethereum blockchain has the effect of dilution of the initial concept of limited supply in bitcoin, but leads naturally to further increases of cryptocurrency assets. Indicative of the growth is the $2.6bn raised so far for ICOs as seen in Figure 3, which surpassed the respective VC fundraising for internet companies.

Figure 3. ICO Fundraising, Source: Coindesk ICO Tracker

On the other hand, CTAs are much more established as an asset class and hedge fund strategy and resemble a typical macro approach but in a more systematic fashion. CTAs trade across multiple markets and asset classes from equities and fixed income to currencies and commodities. CTAs are mainly considered as long-term trend follower, but there has been a lot of differences between CTAs relying on trading time horizon and style. In terms of style, CTAs vary from trend followers and pattern recognisers to contrarian and purely option-based trading. Recent performance has been disappointing, but the low volatility and lack of trends environment reversal will boost the asset class. The key considerations for CTA investing is the increased transparency and liquidity offered alongside diversification, risk/return profile enhancement and profits across different market environments and crisis events.

In Stone Mountain Capital, we have seen a recent trend: systematic CTA managers have started exploring the cryptocurrency markets with their trading algos. As volatility in their traditional asset classes is pretty much at all-time lows across the board, unregulated cryptocurrency markets constitute attractive sources of volatility for CTAs, required for the systematic production of return. The development of coin lending for shorting, spread trading, futures and options and the further regulation of crypto markets will be another source for letting CTAs and crypto strategies grow further together and should lead to further increases of institutional assets in the crypto markets.

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, Stone Mountain Capital LTD. Readers should refer to the Disclaimer.